Hang Seng index forms a rare dangerous pattern as risks intensify

The Hang Seng index continued its relentless sell-off this week as concerns about the US bond market and the Chinese economy continued. The index crashed by more than 3% and settled at H$17,297, the lowest it has been since November last year. It has plunged by more than 24% from the highest point this year.

There are lingering concerns about the US and Chinese economies. In China, the biggest concern is the real estate sector, which is collapsing. Evergrande and Country Garden, which have ~$500 billion in liabilities and thousands of unfinished projects, are collapsing. Other smaller property developers have also collapsed.

The concern is that most Chinese citizens strongly believe in the real estate industry. As such, they tend to have most of their savings in apartments, which have done well over the years. Today, more than 60 million apartments are vacant and prices are slumping. 

The implication of all this is that key sectors like real estate and banking will come under intense pressure in the foreseeable future. There are also contagion risks since most local governments make money by selling their land to developers.

Meanwhile, the Hang Seng index plunged as concerns about the American economy continued. The 10-year Treasuries yield jumped to 4.7% on Monday, the highest it has been since 2007. The 30-year yield also soared to the highest point in years.

The American bond rout has been triggered by the ongoing Fed interest rate hikes and the rising deficits. Estimates are that the US budget deficit will be almost $2 trillion this year while the total debt has jumped to over $33 trillion. The US will also pay more money in interest than in defense. Therefore, there are elevated risks in the global economy as default risks rise.

Most Hang Seng constituents were in the red on Tuesday. Country Garden Services, New World, and Link Real Estate have plunged by more than 6%. Other worst performers were Zhongsheng, Hansoh Pharmaceuticals, PetroChina, Ping An Insurance, and Meituan also slipped.

HSI chart by TradingView

The daily chart shows that the Hang Seng index has been in a strong bearish trend in the past few months. It crossed below the important support at H$17,535, the lowest level on August 22nd. The index has remained below the 50-day exponential moving average (EMA). It has also formed a descending channel and is now slightly above its lower side.

The H&S pattern has formed a head and shoulders pattern, which is a bearish sign. Therefore, the Hang Seng index will likely continue falling as risks to the economy continue. If this happens, the next level to watch will be at H$16,820.

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